AFR: Santos understated East Java mud flow damage

09/17/2008

Eric WatkinsOil Diplomacy Editor

LOS ANGELES, Sept. 17 -- Santos Ltd. has rejected speculation suggested by a Sept. 15 report in the Australian Financial Review (AFR) that said: "Santos is facing a blowout in the clean-up bill from the world's largest mud volcano in East Java" because the "disaster cannot be contained." The article cited the United Nations Environment Program and AusAid, that it had understated the severity of the Sidoarjo mudflow incident in East Java.

"Santos is not in a position to comment specifically on the UNEP report," the Australian firm said in a statement. "However, given the conditions at site and current activities being conducted, Santos believes that the provision remains an appropriate estimate of its potential liability associated with the incident."

At the same time, Santo acknowledged that matters could change because "the situation remains dynamic, complex, and uncertain." As a result, Santos said it "will continue to review the adequacy of the provision in light of developments and available information."

The AFR referred to updated costs of $830 million (Aus.), which it said "are nearly 10 times higher than Santos has disclosed to the stock market, leading to accusations that the oil and gas major is deliberately playing down the disaster."

The paper said Santos has an 18% interest in PT Lapindo Brantas, which experienced drilling problems near the site the day before the mud volcano erupted.

"Presuming it paid 18% of mitigation costs," Santos is facing a cleanup bill of $355-829 million over the next 25 years, the paper said, citing the UNEP report.

In its report, the AFR said that impacts of the mudflow are increasing and that the authors of the report envisage three courses of action to mitigate them:

-- Pipe the mud to the sea at a cost of $1.9 billion over 25 years. But there are concerns that the material is too viscous and the pumps would not be able to move the required volume.

-- Pump the mud to a nearby river at a cost of $1.9 billion over 25 years. But there is strong local opposition to this method and concern about the increased flood risk.

-- Build an open canal that would slowly transport the mud to the sea at a cost of $4.6 billion.

The study, commissioned by the Indonesian government and carried out by UNEP and AusAid, says transporting the mud 14 km to the sea and creating a new wetland is the only mitigation option available. The UNEP report has yet to be made public.

The paper also said: "Santos has yet to admit liability for the disaster, which began after a drilling incident in May 2006, and it has paid almost no compensation to the 75,000 people involved."

While Santos said the cause of the disaster has yet to be determined, the AFR cited a June 2008 report by a team of US, British, and Indonesian scientists who expressed 99% certainty that "drilling caused the disaster."

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